Global Energy Investment Is Changing Gears

Global Energy Investment Is Changing Gears

by | published September 4th, 2019

Tomorrow, Marina and I leave for the Persian Gulf.

For the next ten days, my primary location will be Dubai, although I will travel elsewhere in the United Arab Emirates (UAE) and to Doha, the capital of Qatar. My base of operations will be the fabled Burj Al Arab, still the world’s only seven-star luxury hotel, pictured below.

Burj Al Arab, Dubai, UAE
Photo: Jumeirah
Part of the reason for the stay is to kick off a series of travels through the end of the year to celebrate our thirtieth wedding anniversary. But more on the idyllic hotel and Dubai next time.

Because not all my time will be spent celebrating. These trips also will involve meetings in which I advise a group of heavy international energy investors, and today, I want to talk about some of the intriguing changes underway in how that group approaches the energy sector.

My involvement has brought me to some interesting places – London, Paris, Singapore, Abu Dhabi (the capital of the UAE), Morocco, Algiers, Switzerland and Dubai within the past eighteen months, along with earlier visits that also included Frankfurt, Moscow, and Rio de Janeiro. Moscow.

Prior to each, I am provided with the elements participants want me to comment upon. That provides an early indication of where their thinking is taking them.

Allowing, as well, some early indications of revisions in investment placement.

I am not one of the investors; I don’t have the deep pockets these guys have. When they assemble there are literally billions in available funding sitting about the table. I do not select the projects targeted. My responsibility is to provide the market and geopolitical analysis that goes into determining the investment priorities.

There is also another important aspect in the composition of these sessions…

There Are Foreign Changes Afoot

As might be apparent from the places in which we meet, these are global but not American sources of finance. The geopolitics of the last several years has prompted some investors to move away from any U.S. involvement. These are private initiatives is every sense of the phrase; they utilize private channels and, where necessary, private banking.

Now, there are some hard and fast rules about what can be related about the conversations and a strict prohibition against mentioning either by name or position any of the participants. More on that here in Oil & Energy Investor next week.

Nonetheless, before each occasion, the “steering committee” of this very private group provides me with the issues and sector areas of interest.

Here, there are some interesting changes afoot. These are important, given the investments coming from meetings like these often trigger broader moves in the market.

Of course, because I have indications before the meeting what I am expected to analyze, there is a bit more leverage prior to the conclave.

And that, in turn, allows me to provide you with some early signals about revisions in investment trends.

As I complete the next draft of my working presentation (and this needs to be flexible; these folks have an irritating habit of interjecting questions in the middle of my sentences), several trends are emerging as signals of where the money is moving.

The following seem to be the most pronounced.

Renewable Energy and the Overall Sector

First, there continues to be increasing interest in renewables projects globally.

However, two other aspects are quickly coming into view: one relates to the realistic ceiling of the renewable contribution to the energy mix. The other talks about realities in the international energy balance.

The ceiling refers to how much solar and wind power can be added to existing electricity networks before the unit generation costs start rising above alternatives. The aggregate cost includes ancillary considerations, including reliability of grids, availability of service and equipment provision, and local policy/political factors.

The balance involves a matter that has been much discussed here in Oil & Energy Investor.

While there may be moves in some locations to wean economies from hydrocarbons, every analysis (including mine) has concluded that crude oil, natural gas, and coal will continue to be the three main energy sources well into the 2030s. This is especially the case in Asia, where the brunt of global energy demand is rapidly moving.

As a result, any major investment in renewables must recognize the realities of the sector – realities that have brought about a rather paradoxical conclusion. To add significant amounts of renewable sourcing to the balance will require additional investment in traditional energy.

Second, there is a noticeable increase in attention being paid to technology and usage, which used to be considered secondary considerations. However, these days, certain approaches to increasing energy efficiency, along with a range of improvements to the way in which energy is transmitted and stored have become central interests.

Here, what had been the conventional focus of energy investment has broadened to include elements of what used to be considered industrial, tool, and even construction sectors. The proper province of energy investment is expanding.

Third, the way in which financial transactions are being conducted is perhaps the area that is changing the most rapidly.

Investments into large projects has always been about leverage. That addresses the availability and usage of debt.

When Uncertainty Rears Its Ugly Head

To maintain as much control over this as possible, new generations of derivative paper have been introduced.

Some of this is unavoidable. Credit default swaps remain a necessary gradient in fashioning a financial package, especially in certain regions of the world (where greater profit margins are linked to higher risk).

But I am once again noticing an accelerating advance in other kinds of paper that are intended to circulate exposure and, thereby, syndicate the risk. This paper still needs to be valued (that is, collateralized) despite having little tangible asset weight beyond the central investment target (the project being financed).

Each new level of intermediary paper has less genuine independent value apart from the function it serves in amortizing a transaction.

I discussed this at length in one of my books (Read more on that right here). Unless we are very careful here, the crisis in collateralized debt obligations (CDOs) during the subprime mortgage mess of a decade ago could come back to haunt the way energy finance is being run today.

Moves in energy investment are being played out against a backdrop of increasing geopolitical concern. I now spend more time commenting on political parameters than any other single aspect of my briefings. The latitude provided to certain players on the world stage is becoming disproportionate.

It is resulting in the one aspect disliked by investors more than any other: uncertainty.

Finally, these meetings have provided more indication of likely investment moves in areas other than energy, especially as a reaction to international crises. Previously, aside from security and defense considerations, these opportunities have remained outside the rubric of my energy advice to you.

Well, I am in the process of changing that, so stay tuned. There is an exciting new development coming soon.



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  1. Spence Sandford
    September 7th, 2019 at 12:03 | #1

    Congratulations on 30 years.

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